An Economic Analysis of Electronic Secondary Markets: Installed Base, Technology, Durability and Firm Profitability

Abstract

A number of unstructured or partially structured electronic secondary markets exist to enable the sale and trading of goods between consumers. Many tend to be self-administering UseNet groups, or WWW sites for niche products; however, there has been significant recent growth in the number of more general web-based markets of this kind. Apart from facilitating reliable and liquid trade of used goods, the existence of these markets can alter the desirability of new product, as well as products that are complementary/compatible, and one expects to see a proliferation of such trading forums as Internet technology continues to become more widespread and reliable, and less expensive. We present a economic framework for analyzing how these electronic secondary markets affect the demand for a primary product. We then examine when it is optimal for a firm to operate a market of this kind, and when their presence is socially optimal. Surprisingly, we find that in a number of cases, the presence of these markets has a primary positive effect on the profitability of a new good; this leads us to conjecture that there will soon be a number of such trading forums operated by manufacturers of primary goods. We also find that in a majority of cases, it is feasible for a third-party intermediary to profitably operate such a market. Key parameters that affect the desirability of the market are the existing installed customer base, the cost of information technology, the durability of the products in question, their rate of technological obsolescence and the nature of customer preferences.